Karen Huffman, CPA, Controller, City of Tempe
Scott W. Ruby, Attorney, Gust Rosenfeld, P.L.C
Issuance of Debt
•Post Issuance
Bond Compliance
ABC’s of PIBC
• Legal Expert
• What is included in the law
• What does it mean
• Practical Aspect
• What did the City of Tempe do
• What challenges did we face
Post-Closing (What's That?)
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Tax-advantaged bonds are subject to federal tax
requirements BOTH at the time of issuance AND so long
as the bonds remain outstanding.
IRS is concerned about issuers post-issuance compliance
and is “encouraging” adoption of written post-issuance
compliance policies.
IRS concern has manifested into a post-closing
compliance initiative. Governmental issues are now on
the radar screen.
IRS wants issuers to focus on continued monitoring and
better record keeping.
Your Obligation
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Develop a post-compliance program.
Retain certain records.
Monitor private business use of financed facilities; and
changes in use.
Track and Monitor Payments that Result from Financed
Facilities.
Track Investment of Bond Proceeds and monitor the use
of bond proceeds
Calculate Arbitrage and Pay Rebate or Yield Reduction.
Respond to IRS inquiries.
Specific Focus of a Post-Closing
Compliance Program
 Assign responsibility.
 Train responsible person and others who work with
bonds and bond financed property
 Develop a system to monitor compliance that is
integrated with existing accounting systems and will
allow timely discovery and correction of any problems.
 Record retention must be for LIFE OF BONDS plus 3 years
- - who will be around?
Alert! Alert!
Tax-advantaged bonds are
subject to federal tax
requirements BOTH at the time of
issuance AND so long as the bonds remain
outstanding.
IRS Form 14002
Retain Certain Records
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Basic records:
 Transcript
 Ordinances
 Opinion
Documentation evidencing expenditure of bond
proceeds.
Documentation evidencing all sources of payment or
security for bonds.
Documentation pertaining to any investment of bond
proceeds.
Remember, the burden of proof is on you to establish the
bonds are Tax-Exempt if you are audited – you can only
do so through records.
Life of Bonds + 3 Years
• Biggest Challenge:
• AP Invoices
Monitor Private Business Use of
Financed Facilities
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What was intended use of facility being financed by the
bonds?
Who “owns” it? (Use federal tax definition of owner).
Who was using it, who is using it, and who may use it?
Is there any “bad” use? How much? (10% and 5%
Rules).
Practical difficulties – your the CFO … who else has
control of the building and programming? (Need for
formal policy and procedures.)
Track and Document Changes
in Use
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Create central repository, clearinghouse process through
your office.
Review (before it happens) any change in the use of the
financed facilities.
Changes in use can trigger change in the tax status if not
done properly and the changes and tax impact are very
fact intensive
Track and Monitor
Contracts/Leases that Touch
Financed Facilities
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Types of Relationships that create private use:
 Leases
 Management and Services Contracts
 Research Contracts
 “Partnerships” with private uses?
 Sales agreements
 Take or Pay Contracts
 Land Use agreements, easements, naming rights,
licenses
Track and Monitor Payments that
Result from Financed Facilities
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Review Payments from Users of the Facilities Regardless
if Used to Pay Debt Service.
Lease Payments.
Payments from Management Contracts.
Proceeds from Sale of Facilities.
Allowed to Reduce Payments by Operating Expenses.
Monitoring Private Use
Investment of Bond Proceeds
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Allowable Investments:
 Proceeds may be restricted to tax-exempt (non-AMT)
investments depending on use of the proceeds, initial
expenditure projections, and/or other bond covenants
 Investments must comply with ALL of the following:
 Arizona statute for investment of public funds
 Issuer's investment policy
 Authorized investment list included in bond
covenants (if applicable)
Investment of Bond Proceeds
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Investments beyond any qualifying temporary period
may have further restrictions – check with bond counsel
and/or your bond documents to ensure compliance
Initial investment of proceeds:
 Match investment maturity dates and amounts to the
project draw schedule
 If the issue may qualify for a spending exception to
rebate; be sure to structure your portfolio to
accommodate the timing of the expenditures
 No investments should mature beyond the temporary
period (if applicable) in the initial portfolio.
Reimbursement With Bond
Proceeds
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Bond proceeds can be treated as spent (no longer need
to track the investment of the money) if used to
reimburse the issuer for certain qualifying prior
expenditures.
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Expense was paid no earlier than 60 days prior to
declaration of official intent to reimburse.
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Reimbursed not more than 18 months after the facility was
placed in service or 3 years after bonds are sold.
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Exceptions exist for certain preliminary expenditures.
City of Tempe’s Debt Practices
Typical Debt Issuance
Prior Year Expenditures
Up-coming Year’s Anticipated
Expenditures
Current Year’s
Bond Issuance
Reimbursement
+ Investment
• Immediate
reimbursement of
funds spent
• Remaining
investment in LGIP or
Trust Account
• Advantage- meeting 24 month
arbitrage spending exception +
temporary period
• Disadvantage- using City’s cash initially
Arbitrage Bonds
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Bonds become taxable if the Bond is an arbitrage
bond.
Arbitrage bond exists if the issuer violates either the:
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2.
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Yield restriction requirement; or
Rebate requirement.
Yield Restriction Requirement:
 Gross proceeds cannot be invested in a materially
higher yield;
 A materially higher yield is (some exceptions):
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Governmental Project Bonds: 1/8 of 1% (.125%)
greater than the bond yield;
Refunding Bonds: 1/1000 of 1%; and
Other Types of Bonds: Other limits.
Arbitrage Bonds (cont’d)
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Exceptions to Yield Restriction Requirement.
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Investment in tax-exempt bonds (non-AMT).
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Temporary period for construction fund (3 years) or bona
fide debt service fund (13 months).
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Reserve or replacement fund.
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Minor portion: lesser of 5% of sales proceeds or $100,000.
Bonds must also “pass” the reasonable expectations test.
Can lower the yield with yield reduction payments (some
exceptions).
Arbitrage Bonds (cont’d)
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Rebate Requirement.
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Certain earnings must be rebated (e.g. earnings on the
construction, reserve and debt service funds).
Exceptions to Rebate.
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Small Issuer: governmental issuer who issues less than $5
million of tax-exempt obligations in the year.
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Spending: (1) 6 months – spending 100%; (2) 18 months,
spend certain percentages by 6, 12 and 18 months; (3) 24
months (construction bonds), spend certain percentages by
6, 12, 18 and 24 months. (Still rebate on reserve and debt
service funds).
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Bona Fide Debt Service Fund: If $100,000 or less.
Arbitrage Rebate and Yield
Reduction Calculations
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Issuer is responsible for rebate and yield reduction
calculations:
 Calculations must be completed every 5 years (IRS)
and payment remitted if required
 Calculations are typically done more frequently
(annually, monthly..) to monitor and track liabilities
and spending exceptions if applicable
 A rebate fund must be established if a liability exists to
set aside funds for payment
 If calculations show no payments are due, no reporting
is required to the IRS
Arbitrage Rebate and Yield
Reduction Calculations (cont’d)
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Choose accounting method with respect to bond
proceeds and interest earnings, investment, and
expenditures.
Obtain computation of “yield” of bonds and establish
procedure to track investment returns.
Establish procedure for allocation of bond proceeds and
interest earnings to expenditures, including
reimbursement of pre-issuance expenditures.
Tips to Avoid Becoming an
Arbitrage Bond (cont’d)
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Monitor compliance with “temporary period”
expectations for expenditure of bond proceeds, typically
3 years for new money bonds, and provide for yield
restriction of investment or “yield reduction payments” if
expectations are not satisfied.
Establish procedures to ensure investments acquired
with bond proceeds are purchased at fair market value.
These can include use of bidding procedures under
regulatory safe harbor.
Tips to Avoid Becoming an
Arbitrage Bond (cont’d)
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Avoid formal or informal creation of funds reasonably
expected to be used to pay debt service on bonds
without determining in advance whether such funds
must be invested at restricted yield.
Consult with bond counsel before engaging in postissuance credit enhancement transactions (e.g., bond
insurance, letter of credit) or hedging transactions (e.g.,
interest rate swap, cap).
Identify situations in which compliance with applicable
yield restrictions depends upon later investments, (e.g.,
purchase of 0% SLGS from U.S. Treasury), and monitor
implementation.
Tips to Avoid Becoming an
Arbitrage Bond (cont’d)
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Monitor compliance with 6-month, 18-month, or 2-year
spending exceptions to rebate requirement.
Arrange for timely computation of rebate liability and, if
rebate is payable, for timely filing of Form 8038-T and
payment of rebate. Rebate is ordinarily due at 5-year
intervals.
Arrange for timely computation and payment of “yield
reduction payments,” if applicable.
Issuers/borrowers frequently engage outside
arbitrage/rebate consultants to do such computations.
Tracking Expenditures
Debt Service Fund
IRS
Summary
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The tax-issues do not go away once you close the bonds.
Continuing obligations are important.
Uses of your buildings that were financed with bond
proceeds will probably change over 20 plus years.
IRS is becoming much more active in policing postissuance compliance matters
Consequences of non-compliance:
 Bonds could forfeit their tax-exempt status.